Preface March 12, 2019: These are two *highly imperfect (i.e. defective)* lectures I was invited to give to students in Bangalore almost 19 years ago. I published them in draft in 2010 as I did not agree with the BBC’s “Virtual Revolution” programme broadcast today attributing to e.g. Woodstock and the Grateful Dead perhaps more credit than is due to them for the IT-Revolution.

This is no more than a draft survey of the area, nothing original, and it says more than I can understand myself years later.

On the Economics of Information Technology: Some Questions of Supply, Demand, Price & Policy

Two lectures at the Indian Institute of Information Technology, Bangalore, 15-16 November 2000

by Professor Subroto Roy, PhD(Cantab.)

Part I: Advances in Information Technology from Ancient Times to the Present Day

Advances in Information Technology through the Ages• Before the Age of Electricity• In the Age of Electric Power 1840-1940• In the Transistor & IC Age, 1940-1970• In the PC Age, 1970-1990• In the Internet Age, 1990-2000• Beyond 2000 in India and elsewhere

Part II: Demand and Prices, Policy

Part I: Advances in Information Technology from Ancient Times to the Present Day

Advances before the Age of Electricity: Textiles
• India: 5th Cent. BC, Greek descriptions of popularity of brightly coloured Indian textiles exported to Persia.
• Chinese block printing used for textiles, paper money, playing cards.

Advances before the Age of Electricity: Jacquard loom
• Jacquard loom (France 1720-1840) to which origins of computer science can be traced. Named after Joseph Marie Jacquard (1752-1834), but in fact originates in work of three others before him — an early example of how fame may not be closely related to actual effort.

• Weaving requires continual change in patterns by which longitudinal and vertical threads (‘warp’ and ‘weft’) come together in a ‘simple’.

• 1725 Basile Bouchon first to use endless band of perforated paper containing these pattern instructions.

• 1728 M. Falcon constructs machine known since as Jacquard loom; operates by perforated cards but still requires “drawboy” to manipulate it.

• 1745 Jacques de Vaucanson unites designs, invents mechanism for operating it from one centre.

• Jacquard loom fiercely opposed by silk-weavers but by 1812, there are 11,000 Jacquard looms in France; declared public property in 1806. Jacquard receives a State pension and royalties. A statue of him erected in Lyons in 1840 after his death. (But here today, in India in 2000, we recall the names of Bouchon, Falcon and Vaucanson too.)

• Jacquard loom quickly spreads from silk to cotton and linen. The cost of textiles with woven patterns falls.

Advances before the Age of Electricity: Printing
• Buddhist sutra 868 AD oldest printed book in existence.

Advances before the Age of Electricity: Calculators & Computers
• Abacus, China 4th Cent BC; sliding beads on a rack. Loses importance as use of paper & pencil spreads in Europe. But 1200 years before next major advance.

Advances in the Age of Electric Power 1840-1940: Telephone
• c. 1874 (Amer.) Alexander Graham Bell conceives correct principle: “If I could make a current of electricity vary in intensity precisely as the air varies in density during the production of sound, I should be able to transmit speech telegraphically.” 1876 Bell patents his phone. First sentence transmitted: “Mr. Watson, come here; I want you.” Elisha Grey close on Bell’s heels; long patent battle ensues upto U. S. Supreme Court.
• 1877 (?) American Telegraph & Telephone Co. started.
• Bell conceives network principle of connecting every potential user with every other.Advances in the Age of Electric Power 1840-1940: Television
• 1873 (Eng) Telegrapher May discovers basic principle of translating light into electrical signal.
• 1888 (Amer?) Hallwachs demonstrates photoelectic effect: electrons emitted instantaneously from illuminated surface.
• 1923 Baird (Eng), Jenkins (Amer) transmit crude black-and-white silhouettes in motion.
• 1936 BBC inaugurates first TV entertainment programme.
• (INDIA early 1960s Television broadcasts begin in New Delhi on an experimental basis; one hour every Saturday and Sunday.)

Advances in the Age of Electric Power 1840-1940: Computers
• 1889 (Amer) H. Hollerith, to find fast way to calculate U. S. Census, uses Jacquard loom idea of punch cards to store information. Each punch represents a number, combinations a letter. 80 variables on one card. Instead of 10 years, Census compiled in 6 weeks by machine mechanically. 1896 Hollerith brings his invention to the business world founding Tabulating Machine Co., which evolves after mergers into IBM in 1924. Punch cards used for data processing into the 1960’s and 1970s.
Advances in the Age of Electric Power 1840-1940: Computers (cont’d)

• IBM PC 1981 Landmark announcement stuns computing world, especially as IBM Chairman supposed to have said PCs would never fly and mainframes would dominate forever. Despite weaknesses, PC based on open architecture permitting growth. Plus release of Lotus 1-2-3 a year later, makes business world sit up and take notice.
• PC and its clones dominate industry. PC cost $3,000, 64 Kb RAM, floppy disk drive, monochrome graphics. Also with DOS, based on CP/M. In its rush to enter the market, IBM licenses DOS from tiny Microsoft. Later regrets decision not to write its own OS at the time.
Processor Wars
• IBM PC based on Intel 8088; 16-bit proc., 8 regs, 100 instructions, unusual segmented 20-bit memory architecture capable of addressing 1 Mb memory. Clock speed 4.77 MHz in original. 8088 was the second x86 after 1978 8086 which used 16-bit external busses, while 8088 used 8-bit busses. 8088 20% slower than 8086, but 8-bit busses critical to keep down cost.
• Decision to use x86 architecture widely criticized; IBM’s own engineers wanted to use better Motorola 68000 but IBM had already obtained rights to manufacture 8086 for use in “Displaywriter” typewriter, in exchange for giving Intel rights to bubble memory technology.
Processor Wars (Cont’d)
• Also 8088 could use existing low cost 8-bit components, whereas 68000 components more expensive and not widely available.
• Thanks to PC’s open design, Intel x86 architecture goes on to completely dominate industry.
• AMD 386 first successful rival x86 processor. Intel’s original 16 MHz 386 introduced in 1985 at $299. By 1990, $171, and 33 MHz version $214. AMD’s 40 MHz 386DX released in March 1991 at $281, but within a year price fell 50% to $140. Prices of PCs followed chip prices, and fell by as much as $1000. Market for PC’s running Windows expanded by over 33%.

“Hypertext”, anticipated and invented
• 1945: Vannevar Bush, US President Roosevelt’s scientific adviser, describes photo-electric device based on micro-film, to store vast amounts of data in single disk, with mechanical aids to find, organize, add documents. Considered by founders of World Wide Web 50 years later to be anticipation of “hypertext”.
• 1968 Douglas Engelbart, inventor of the Mouse, produces first hypertext.
• 1979 Charles Goldfarb invents SGML. Separate content structure from presentation. Thus same document can be rendered in different ways. HTML markup language of Web, is SGML application.

Prediction of Internet
• (Anon. Eng) 1970: “These computing systems will form an interlocking network of information retrieval and processing systems well able to master the information explosion and the demands of any educational set-up. With this network established, man will have passed from the industrial age into the cybernetic age, and will have to re-think his approach to education, employment, leisure and society at large. He will have to rethink his approach to education because the computer will gradually control all structured tasks, whether they be the production of goods or the carrying out of commercial procedures.” (Times Literary Supplement Jan 1)

Origins of the Internet & World Wide Web
• 1972 US Defense DARPA starts research to connect research centres for data exchange; also for military purposes; automatic routing of information packets, reducing vulnerability through failure of single transmission nodes (in case of e.g. nuclear attack).
• 1981 Ted Nelson ‘Literary Machines” describes project Xanadu: networked, world-wide system of publication.
• 1987 CERN and US labs connect to Internet as means of exchanging data beween High Energy Physics labs.
Birth of the World Wide Web 1990-1995
• 1989 Tim Berners-Lee, Robert Cailliau propose networked Hypertext system for CERN and document handling inside the lab.
• 1990 Mike Sendall buys a NeXT cube for evaluation, and gives it to Berners-Lee; prototype implementation on NeXTStep;

Birth of the World Wide Web 1990-1995
• the Portable “Line-Mode Browser”. SLAC, the Stanford Linear Accelerator Center in California, becomes first Web server in USA. serves the contents of an existing, large data base of abstracts of physics papers.Distribution of software over the Internet starts. Hypertext’91 conference (San Antonio) allows CERN a “poster” presentation (but does not see any use of discussing large, networked hypertext systems…).
• 1992 portable browser is released by CERN free
• Berners-Lee and Laboratory for Computer Science (LCS) of MIT start W3C Consortium in the US.
• Tim Berners-Lee leaves CERN for MIT (December).
• CERN Council approves
• Many HEP laboratories now join with servers: DESY (Hamburg), NIKHEF (Amsterdam), FNAL (Chicago).
• Interest in Internet population picks up.
• Gopher system from the U of Minn, also networked, simpler to install, but with no hypertext links, spreads rapidly.
• CERN needs Web browser for X system, but have no in-house expertise. However, Viola (O’Reilly Assoc., California) and Midas (SLAC) are wysiwyg implementations that create great interest.
• The world has 50 Web servers!
• 1993
• Viola and Midas are shown at Software Development Group of NCSA (the National Center for Supercomputing Applications, Illinois).
• Marc Andreessen and Eric Bina write Mosaic from NCSA. Easy to install, robust, and allows in-line colour images. This causes an explosion in the USA.
• CERN produces Web server software with basic protection mechanisms.
• European Commission approves first WWW based project: “Wise”, for dissemination of information to small and medium enterprises (DGXIII, the Fraunhofer Gesellschaft (Darmstadt/Rostock) the CCG (Portugal) and CERN).
• We have 250 servers!
• 1994
• Jim Clark is advised to look into the Internet. He founds MCC, later Netscape.
• We have 2500 servers.
• 1995 January, CERN and the European Commission invite INRIA, the Institut National de Recherche en Informatique et en Automatique, to continue European involvement. INRIA has five sites in France and is heavily involved in European projects and collaborations with similar institutes in Europe and the world.
• Sun Microsystems produces HotJava, a browser which incorporates interactive objects.
• To give individuals a voice, a user-group type organisation is needed. This leads to the founding of the Web Society in Graz (Austria).
• we register 700 new servers per day!
• W3Consortium Oct 1994 to lead Web to its full potential by developing common protocols promote its evolution and ensure interoperability. leading the technical evolution of the Web. has developed more than 20 technical specifications for Web’s infrastructure. However, the Web is still young computers, telecommunications, and multimedia technologies converge.
• Universal Access: To make the Web accessible to all by promoting technologies that take into account the vast differences in culture, education, ability, material resources, and physical limitations of users on all continents;
• Semantic Web : To develop a software environment that permits each user to make the best use of the resources available on the Web;
• Web of Trust : To guide the Web’s development with careful consideration for the novel legal, commercial, and social issues raised by this technology.
• Standardization: The Web is an application built on top of the Internet and, as such, has inherited its fundamental design principles.
• Interoperability: Specifications for the Web’s languages and protocols must be compatible with one another and allow (any) hardware and software used to access the Web to work together.
• Decentralization: Decentralization is without a doubt the newest principle and most difficult to apply. To allow the Web to “scale” to worldwide proportions while resisting errors and breakdowns, the architecture(like the Internet) must limit or eliminate dependencies on central registries.
• User Interface Domain seeks to improve user interaction with the Web. Includes work on formats and languages that will present information to users with more accuracy and a higher level of control.
• The W3C Technology and Society Domain seeks to develop Web infrastructure to address social, legal, and public policy concerns.
• HTML : Three versions of HTML have stabilized the explosion in functionalities of the Web’s primary markup language. HTML 3.2 was published in January 1997, followed by HTML 4 (first published December 1997, revised April 1998, revised as HTML 4.01 December 1999). XHTML 1.0, which features the semantics of HTML 4 using the syntax of XML, became a Recommendation in January 2000.
• By allowing the separation of structure and presentation, style sheets make site management easier and promote Web accessibility. CSS1 was published in December 1996, and CSS2 in May 1998.
• HTML : Three versions of HTML have stabilized the explosion in functionalities of the Web’s primary markup language.

Economics of Information TechnologyPart II: Demand and Prices

*Information can be true or it can be false.*

Classic Example of False Information: Most Famous Newspaper Error of All Time, US Presidential Elections 1948 A victorious President Truman holds up “Dewey Defeats Truman” with a smile, US Presidential Elections 1948

That was November 1948. Almost the same thing happened two days ago — the American newsmedia announced Gore had won in Florida, only to retract it shortly afterwards, and say Bush had won Florida.
Today, right now, nobody yet knows who has won in Florida.

All empirical or factual or contingent or scientific questions admit more than one possible answer — only one of which is true or correct or consonant with reality.

“Demand” for False Information

• Human beings have throughout history had some demand for information they knew to be false or unreal, i.e., the demand for fiction and fantasy.

*Entertainment, Religion & Sports*

• We read Arabian Nights or A Tale of Two Cities or even Anna Karenina knowing the characters are unreal;

• We watch Bruce Willis or Anil Kapoor beat dozens of villains knowing it is unrealistic & fabricated.
• Hollywood & Bollywood thus provide us information we know beforehand to be false.
• We don’t go to a Hollywood or Bollywood movie with the idea of getting an education — we demand it for independent reasons other than literal or scientific truth, like being entertained for relaxation, or perhaps to learn some moral lesson about e.g., courage or love.
• So we allow the movie-maker some “dramatic license”.

• Religion and Sports may be somewhat similar categories of demand.

• In Religion, too, we do not expect literal, scientific, empirical truth, but perhaps some more metaphorical meaning about our life and the world.
• In Sports, harmful combat is simulated by some harmless contest or game, perhaps again telling us something about human courage or endurance.
• (Why we are angry with “match-fixers” is that they alter a genuine simulated combat into a simulated simulated combat.)

*Data Volume, Transmission Cost and “Cognitive Processing”*

In general though, when we speak of a demand for information, we mean a demand for *true* information

— this implies there is some cost in resources in finding out whether information is true or false.

I.e., whether the content of a given message is or is not true – whether it should or should not be believed or acted upon — has to be determined, proved, or established as the result of some appropriate test in each case.

Or, alternatively, in the words used by information theorists, there is some real resource cost to “filter” or “cognitively process” raw data before it becomes “information”, whether “statistical” or “pragmatic”.

• Modern information technology has allowed the cost of transmission to decline and the speed and volume of transmission to increase. But the ability of human beings to “cognitively process” data into information may not have increased commensurately.

• (I.e. information is not synonymous with knowledge; information may increase but not knowledge.)

• Vannever Bush in 1945 spoke of “information overload”.

• Jacob Marshack and Roy Radner and others speak of the relative cheapness of communication compared with the high cost of cognition.

• In April 2000, I told the Reserve Bank of India’s Conference of Finance Secretaries: “Managing a process of public financial decision-making requires coincidence of the people who have the best information with the people who have the authority to act. Decision-makers need to have relevant, reliable and timely information available to them — and then they need to be considered accountable for the decisions made on that basis.”

• I said: “No matter how competent or well-meaning a Finance Commission may be, its purpose may be stymied by the overload of information and overcentralisation of authority that has come to take place.” I quoted from Justice Qureshi, a recent member: “it is humanly impossible for a person to understand the problems of the Centre and the 25 States and take a decision thereon within such a short time”.

*IntraTeam and InterTeam Information*

• Information transactions may be classified as those between
• Cooperating parties, I.e. within teams
• Competitive parties, I.e. between teams

A “Team” is a set of agents

Who have the same goal

Who know each other well enough to process information transactions between themselves at low or zero cost;

I.e., who trust the reliability of information exchanges between one another.

A New Concept Proposed: M2TM (the parent of B2B)
• Let me propose a new concept here and now: TM2TM
• TM2TM is the parent of B2B
• It refers to “Team Member to Team Member” exchanges;
• I.e. information transactions between members of the same team.

Examples of teams
Members of the same family (goal: maximise happiness of all members)
Members of the same firm (goal: e.g. maximise profits or minimise costs)
Members of two different families interconnected by marriage (goal: enhance the value of the marriage)
Members of two different firms interconnected by a supply chain (goal: enhance efficiency and value; maintain contracts with one another)
“Incentive compatibility”
• In other words, members of teams have compatible incentives to convey true information in their messages.
• Hypothesis: all successful cases of information application occur in teams e.g.
• Personal communication (like email between friends and family)
• Industrial applications like CAD CAM, MIS, Intranet

*Properties of Information as a Good*
• Economists have long identified certain peculiar characteristics of information when seen as a scarce economic good, i.e., one commanding a positive value or price.

Specifically, information unlike tangible goods:

• Is not destructible and does not deteriorate
• Travels at the speed of the signal
• Causes each new buyer to become a potential seller, making property rights hard to define.

At every moment, there are an infinity of events occurring all over the physical world, the plant and animal world and the human world. To have true information about all these events would be to be omniscient, to be conscious or aware of all of reality.

We cannot be, do not have to be, and should not be (Aristotle) concerned with more than a tiny fraction of all possible events.

In general, information is a derivative good, which always refers to some or other underlying factual or contingent event.

The value of information about an event will reflect both

the value of the underlying event;
and
the scarcity of the message itself.

*Pricing issues in Internet Economics*
• Internet Economics defines a “positive/negative network externality” when a benefit/cost accrues to one user by actions of another user.
• Fax pricing: fax usage increased due to positive network externalities.

• The key debate has been between those advocating
• Flat rate pricing
• Usage-based or “responsive” pricing
• Regulated pricing (not necessarily by government but by a collective)

Western views on The Bangalore Phenomenon:
Do Foreign Visitors Flatter Us?
• That India is or will soon become an “Information Technology Superpower” is being said publicly by every visiting foreign dignitary, Americans, Russians, Germans, Singaporeans — even the British!
• Should we believe them? Or are they flattering us, perhaps trying to sell us something or buy something from us cheap?

Western views on India as an IT competitor:
(1) Annalee Saxenian, UC Berkeley
• Bangalore is not and cannot become Silicon Valley which is rooted in semiconductor manufacturing, and is “the world’s most diversified and sophisticated centre of technology and entrepreneurship”; evolved over 50 years, now 9,000+ technology firms; 350,000 workers.
• Bangalore emerged in the late 1980s “as a source of low-wage software skills for programming tasks…could become a leading centre of high value-added design and entrepreneurship.” Times of India interview Jan 2000
Western views on India as an IT competitor:
(2) OECD Information Technology Outlook 2000
• “OECD countries still retain the major share of the software industry, but non-member economies are increasingly important in some areas. India is most often cited in the area of outsourcing software development, with an estimated USD 3.8 billion in revenue in 1998-99, and 50% annual growth in revenue over the past few years. However, India’s software industry faces a number of challenges as its labour cost advantage shrinks, and it provides an excellent case study of recent and possible future development paths in a dynamic, highly competitive industry.

(2) OECD 2000 (Cont’d)
• “Initial development of India’s software industry was closely tied to the indigenous computer hardware industry, which grew because of the availability of skilled workers and the government’s nuclear and space policy. Since the late 1980s, the industry has grown rapidly, thanks to a combination of human resource endowments, favourable government policies (including liberalisation and substantial investments in higher education) and good timing. It now focuses on exports (close to 70% of revenue), mostly of software services (85% of exports); the United States is its main export market (over one-half of exports).”

• “Growth was initially driven by the diversification of established Indian computer or general firms into software, but current market leaders are relatively new specialised firms, with the top 30 firms accounting for three-quarters of total revenue. There has been little major consolidation and few foreign acquisitions of Indian firms, as the work offers few opportunities for economies of scale and growth rates are very high. Large firms from OECD countries are using India as a platform for outsourcing, usually through long-term service agreements with local firms. In most cases,
Western views on India as an IT competitor: OECD 2000 (Cont’d)
• projects are routine work (low value added) owing to lower labour costs (between one-third and one-fifth of comparable US wage costs). The major sources of competition are other Indian firms or firms from advanced countries (e.g. US firms set up by Indian nationals). Few firms are expected to manage the transition to higher value-added segments. Compared to other countries with spectacularly growing software industries (e.g. Israel, Ireland), the nature of the service projects means that revenue per employee is low. Major challenges to be overcome include emerging skill
Western views on India as an IT competitor: OECD 2000 (Cont’d)
• shortages, with highly skilled workers being attracted to higher-paying jobs, mainly in the United States. Inadequate infrastructure is another obstacle for Indian firms trying to move up the value chain. The Indian experience suggests that governments wishing to use IT industries as part of development strategies need to address areas such as skills development, investment in infrastructure, effectiveness of the financial sector, R&D, IPR protection and procurement…..

May 7 1957 outside our new home, 73 Riverdale Avenue, Ottawa. My father had been recently posted to Canada. We arrived in New York by the SS Ivernia on my second birthday. My father’s previous posting had been at the Embassy of India, Tehran, where I was born.

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